Bank BPH: 4Q05 preview
Bank BPH is due to report 4Q05 results on February 21. We expect the bank to report net earnings of PLN 309.5m for 4Q05, up 18.4% q/q and 55.6% y/y (IFRS/PAS). This equates to a full-year net profit of PLN 1,025.9m, up 36.0% y/y (IFRS/PAS), which is slightly higher than consensus estimate of PLN 967.1m (according to Multex). With the CEO, Jozef Wancer, confirming in January that the bank's 2005 net profit exceeded PLN 1bn, we head into these results expecting bank to beat our previous earnings estimates of PLN 965.9m by 6.2%.
We reiterate our Hold rating on the stock (on the valuation grounds). On the back of the above-mentioned earnings revision and a decline in the Polish yield curve, we have lifted our fair value estimate by 5.9% to PLN 783.9 per share (including a 10% uplift to our stand-alone valuation on synergy from a probable merger with Bank Pekao), implying upside of 1.8%.
• Net interest income is expected to come in at PLN 513.4m in 4Q05, up 1.0% q/q and 41.9% y/y (IFRS/PAS). After the outperformance of our estimates last quarter, we believe that 4Q05 interest income will finally be negatively impacted by falling interest rates, with 3m-average WIBOR down 85bp to 4.38% in 2H05, and stiffer competition. Though the market experienced fairly strong lending volumes in 4Q05, with mortgage loans up 11.1% q/q (outperforming our estimates) and consumer loans growing by 3.2% q/q (underperforming), we expect Bank BPH to have have faced a growing competition, mainly from more aggressive smaller banks. Overall, we expect Bank BPH to at least maintain its market share in most lending products.
• Net fee income is expected to rise to PLN 286.5m in 4Q05, up by 44.6% y/y and 8.6% q/q. BPH is expected to maintain momentum in its mutual fund business, winning another 1% market share in 4Q05. The level of AUM increased by 95.1% in 2H05, while the market grew by 35.8% over the indicated period. Net fee income has also been driven by growing volumes in transaction fees on credit and debit cards, as well as retail loans, mainly cash loans. We have raised our full-year estimate for net fees by 3.1% to PLN 1,021.3 (34.0% y/y IFRS/PAS) for 2005 and by 1.5% to PLN 1,101.7m (+7.9% y/y) for 2006.
• General and administrative expenses are expected to come in at PLN 373.8m in 4Q05, which is down 2.3% y/y and 2.9% q/q. Management has indicated that due to further uncertainty on the merger, the pace of expansion has slowed down and we would expect to see some net 5 new branches opened in 4Q05, bringing the total new branches opened from the beginning of the year to 23 versus the originally planned 56. Management has lately scaled down its expansion strategy, with a total of 44 new branches to be opened by the end of 2006 (versus 77 planned previously) but the number of low-cost-partner outlets is currently seen to be growing rapidly to reach up to 600 partner outlets by the end of 2006 from the some 400 that were functioning by the end of 2005. Lower-than-planned investment in the distribution network, in front of the potential merger, has been beneficial to the near-term earnings but also affects the outlook for new business volumes. We have revised down our full-year estimate for operating costs by 1.5% to PLN 1,543.5 maintaining the level of last year costs for 2005 and by 1.7% to PLN 1,1601.6m (+3.8% y/y) for 2006.
Net provisioning requirements are forecast to come in at PLN 63.1m in 4Q05, down 26.5% y/y but up 3.1% q/q. Whilst many banks in the sector have benefited from unsustainably low provisioning requirements this year, Bank BPH has maintained a more-or-less normal run rate of 71 bps over gross loans on an annualised basis. Nonetheless, we believe there has been an improvement in the business environment for both retail and corporate clients, reflected in a downward revision of our net provisioning expectations by 6.2% to PLN 259.3m (down 5.2% y/y) for 2005 and by 4.1% to PLN 292.6m (up 12.8% y/y) for 2006.
We continue to believe that the merger of Bank BPH with Bank Pekao is probable, though the decision is seen to be delayed. With latest exchange of the letters between the EC and the Polish government, Poland’s appeal in the European Court of Justice against the EC decision, and the EC’s reply that this would not delay the merger, we believe UniCredito has a strong case. The next banking supervision commission meeting (expected to discuss the UniCredito case), due on March 8, should shed further light on the matter. Eyes should be also turned on the EC, which is now examining whether the 1999 Bank Pekao privatisation agreement is legal, after Poland joined the EU.
We maintain our view that, from a short-term trading perspective, Bank BPH has benefited (on speculation that minorities could benefit from the high price of a trade sale) and that Bank Pekao has suffered (as potential merger synergy appears in doubt or at least delayed). In our opinion, these trading issues have already been priced in and on valuation grounds we reiterate our Hold rating on Bank BPH with a fair value estimate of PLN 783.9 per share.